Please ensure Javascript is enabled for purposes of website accessibility

Why Tesla Had to Lay Off 3,000 SolarCity Employees

By Evan Niu, CFA - Mar 2, 2017 at 2:56PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors are expecting cost synergies.

CEO Elon Musk called it "a dirty word": synergies.

Tesla's (TSLA 1.72%) acquisition of sister company SolarCity last year was an incredibly contentious and polarizing deal. Some saw it as a bailout, while others bought into Musk's vision of a vertically integrated sustainable energy company. Independent of which side of the fence you're on, Tesla did commit itself to realizing $150 million in direct cost synergies within the first full year after closing. Those cost synergies were largely comprised of "sales and marketing efficiencies" as well as general corporate and overhead savings.

But "efficiencies" almost always translates into layoffs when it comes to mergers and synergies, which is why Tesla had to lay off 3,000 SolarCity employees last year.

Home with solar system, Powerwall battery, and Model 3

Image source: Tesla.

Sales and marketing expectedly took the biggest hit

Both Tesla and SolarCity filed their respective 10-Ks yesterday, and total headcount saw a 20% reduction to 12,243 employees. That represents a little over 3,000 employees that were let go, with sales and marketing receiving the most cuts.

Job Function

2015 

2016 

Change (YOY)

Operations, installations, and manufacturing

6,873

5,332

(22%)

Sales and marketing

5,661

4,155

(27%)

R&D and general and administrative

2,739

2,756

0.1%

Total

15,273

12,243

(20%)

Data source: SEC filings.

Last year marks the first time that SolarCity's total headcount posted an annual decline. Some of this was already known, although the degree of which was previously unclear. The company had a high-profile exit from Nevada following an unfavorable regulatory ruling regarding net metering, which severely impacted the economic viability of solar systems within the state.

In August 2016, SolarCity also disclosed that it would be working on reducing operating expenses "to match the Company's reduced guidance" on installations, as SolarCity began shifting its focus away from growth and emphasizing a more sustainable cost structure. At the time, SolarCity said it would incur $3 million to $5 million in restructuring charges, while co-founder brothers Lyndon and Peter Rive both dropped their annual salaries down to $1.

The other half of the equation

It's important to distinguish between cost synergies and revenue synergies. While the $150 million in cost synergies that Tesla is targeting is important, revenue synergies are just as -- if not more -- important since Tesla hopes to transform the way that people purchase solar systems. Instead of labor-intensive channels like door-to-door sales or retail lead generation, Tesla hopes to create a one-stop shop where customers can purchase a fully integrated system that includes an electric vehicle, solar system, and battery storage -- a transaction that could easily be $70,000 or more.

It remains unclear if this vision will resonate with consumers or if it will prove to be cost-effective, but it certainly has the potential. Much like with electric cars, solar sales have a steep educational curve, which is partially why the existing distribution methods are so labor-intensive. Revamping sales channels combined with needing to generate cost synergies is a recipe for layoffs.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$693.50 (1.72%) $11.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.